Post-election postmortem Post-election postmortem\images\insights\article\flag-skyscraper-small.jpg November 13 2020 November 13 2020

Post-election postmortem

Market’s attention shifts to the Senate.

Published November 13 2020
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Bottom Line This is so 2020. The most consequential election in our lifetimes was held 10 days ago, and here we are on Friday the 13th, still not knowing definitively who will control the White House and both houses of Congress come next year. In fact, control of the Senate may not be decided until the two Georgia state runoff races on Jan. 5. The only thing we know for certain is that the polls were spectacularly wrong for the second consecutive election cycle. Tighter election results may have important implications for economic and corporate profit growth and financial-market performance.

“Are you better off?” A Gallup poll in September found that 56% of Americans said that they were better off today than four years ago. The Wall Street Journal said that is higher than President Reagan at 44% in 1984, President Bush II at 47% in 2004, and President Obama at 45% in 2012, all of whom successfully won re-election bids.

Yet, despite this, many of the national polls, the political pundits and the betting markets all assured us that former Vice President Biden likely would defeat President Trump by a double-digit margin. Moreover, the Democrat-controlled House of Representatives likely would expand its current 35-seat lead by 10-20 seats and majority control of the Senate likely would flip back to the Democrats from their current six-seat deficit. That ensuing Blue Wave would provide the Democrats with a consolidated legislative mandate, which would allow them to introduce a sharply progressive fiscal-policy regime shift, including higher corporate and individual tax rates and tighter regulatory control.

Blue Wave jitters reversed The S&P 500 declined almost 9% from Oct. 12 through Oct. 30, as investors were pricing in the likely prospect of this Blue Wave. But in part because Trump and Republicans performed much better than expected at the polls—keeping alive the favorable prospect of divided government in Washington—the S&P rebounded nearly 13% over the next six trading days on an intra-day basis.

According to our research friends at SunTrust, this powerful snapback has important longer-term financial-market implications. There has been a dozen such instances in the post-war history of the U.S. in which the S&P rallied 10% or more over six days. In all instances but one (the bursting of the technology bubble in 2000), the stock market was higher a year later by an average of 20%. That’s consistent with our current 4,200 price target for the S&P for year-end 2021. 

State of the state While we expected that former Vice President Biden would win the popular vote by 5-10 million votes, we felt that many of the national polls were wrong because of an oversampling bias error that continued to exist uncorrected from 2016. According to Gallup’s U.S. voter demographics, Democrats and Republicans each comprise 31% of the total, yet many of the national polls continue to oversample Democrats versus Republicans by 10-15%, yielding what we believe were flawed conclusions. As a result, we believed that the electoral college vote would be very close, settled by a coin flip and likely marred by recounts and litigation in a half-dozen key swing states. We also believed that Republicans would narrow the Democrats lead in the House, and that they would hold onto their narrow majority in the Senate.

Record voter turnout Perhaps because of the coronavirus pandemic and their fear of becoming infected, a record 101 million people either voted early in-person or by mail via absentee ballot before election day, and preliminary estimates are that another 60 million or so people voted on election day. So we expected that Trump would be leading in the electoral college vote on election night, but that his lead would erode in the days and weeks after the election, as the tsunami of absentee ballots (80% of which we estimated would be cast by Democratic voters) were tabulated.

Where are we now with the presidency? Biden leads Trump by about five million popular votes at present, and Biden successfully closed his early electoral-college deficit over the past week, as absentee ballots were tabulated in several of the key swing states. At this point in time, Biden has the more than the 270 electoral-college votes needed to win the presidency, but recounts and legal challenges are ongoing. It appears unlikely Trump has any plans to concede the election anytime soon, due to a perceived lack of transparency and irregularities in how the absentee ballots are being processed in several of the key swing states, including Pennsylvania, Michigan, Wisconsin, Georgia, North Carolina, Arizona and Nevada.

Need for national voter standardization Several other large states such as Texas, Florida and Ohio successfully processed their mail-in ballots and reported their consolidated voting results on election night. Yet, several of the above-mentioned swing states are still processing their absentee ballots 10 days later, naturally raising questions. To ensure the integrity of this and all future elections, we need a national standard for all 50 states, such that all absentee ballots are received and processed by election night. 

Dems House lead shrinks Going into the election, House Democrats enjoyed a comfortable 35-seat lead over Republicans, 232-197, with one Libertarian Congressman and five open seats. Moreover, the pundits had forecast that the Dems would likely pad their lead by 10-20 seats. But it appears that many more voters than normal split their ballots this election, voting for Biden at the top of the ticket but also voting for their Republican Congressman at the bottom of their ballot to engineer an effective legislative check-and-balance.

The results to date are stunning. Democrats are now leading 220-208, with seven races still in process. Five of those races are leaning Republican, so a preliminary final tally might approximate a Democrat lead of only 222-213, for a slim nine-seat majority. That change in fortunes may encourage House Speaker Nancy Pelosi, who is facing a tough re-election battle on Jan. 5 for the speaker’s gavel, to compromise on a Phase 4 fiscal stimulus plan with Trump and the Republicans during the lame duck session in coming weeks.

Senate has Georgia on its mind Majority control of the Senate is critically important to orchestrate a legislative check-and-balance with President-elect Biden and a Democrat majority in the House of Representatives. Republicans offset their expected Senate losses in Colorado (Cory Gardner) and Arizona (Martha McSally) with an expected flip in Alabama (Tom Tuberville) and surprising holds in Maine (Susan Collins) and North Carolina (Tom Tillis). A possible flip in Michigan (John James) did not materialize, as Democratic incumbent Gary Peters overcame a sizable deficit to hold onto his seat.

So Republicans now lead by 50-48, with two races still undecided. With a tight presidential race in Georgia, neither Republican incumbent (David Perdue and Kelly Loeffler) exceeded the 50% majority required by state law. As a result, Georgia has scheduled these two run-off elections on Tuesday, January 5. Purdue leads Democratic challenger Jon Ossoff by about 3%. But Loeffler was in a special open election with a dozen candidates, and she will compete against the other top vote getter, Democrat Raphael Warnock. All Republican votes in this race exceeded all Democrat votes.

These two important run-off elections in Georgia may motivate Senate Majority Leader Mitch McConnell to join Speaker Pelosi in a Phase 4 compromise for additional fiscal stimulus during the lame duck. Delta is headquartered in Atlanta and is a major employer in Georgia, and the Phase 4 stimulus would likely include funds for the survival of the airline industry.

So while Republicans are favored in both of these races, there will be a tremendous amount of national focus on these two Senate run-offs. Democrat fundraising and spending in the just-completed elections nationally outstripped Republicans by more than two-to-one, and we are bracing for a torrent of outside money to support these two Democratic challengers. As a result, legislative control of Washington likely hangs in the balance.

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